As Q1'16 Draws to a Close, Risks Remain Ahead for EUR, USD
- EUR/USD may be ready to breakout back towards its August highs.
It's the end of the first quarter today, but the timing couldn't be more (in)convenient for traders (depends on the strategy you employ): the first Friday of the month tomorrow, which means the US Nonfarm Payrolls report will be released.
Typically, the end of the quarter and the beginning of the new one bring about higher volatility as books are rebalanced and capital is repatriated and deployed. However, liquidity tends to tends to dry up around the US NFP report as traders wait to react to the results.
There are thus two countervailing forces at hand. For discretionary traders and event risk traders, this may not pose a problem; they can simply avoid or engage the environment as they normally do. For systems-based or algorithmic traders, this environment is one that needs careful monitoring as conditions can change rapidly - psychological conditions.
Heightened volatility brings about the potential for greater drawdowns, which can be difficult to stomach (assuming the end-trader is a human). These rules-based traders may feel the desire to turn on or off their systems given the environment; this is the wrong decision. By doing so, they in turn become event risk traders themselves. The key is leverage - reducing it is the only way to weather potential drawdowns during periods of heightened volatility.**
As a discretionary trader myself - I try to act on the principle of bounded rationality, that my systems and screens may encompass all that information that I may find necessary to trade, but I recognize that I don't have access to all information, so my parameters may be wrong during certain periods, and I thus subjectively judge whether or not to follow them - this is the type of environment where it's good to have a plan, and stick to it.
If you're a discretionary trader not concerned with the NFP result (i.e., you're fully technical in nature), be mindful of the environment and reduce leverage, especially in USD-pairs; if you are concerned with the NFP result (you incorporate macroeconomic data into your decisions, even as a technical trader), then maybe given the environment - end of quarter, beginning of a new one, NFPs upcoming - it's best to wait until an environment better suited to your trading style comes along. As covered many times, avoiding overtrading in volatile, uncertain environments is one of the cornerstones of our "Traits of Successful Traders" series - it constitutes sound judgment for risk management principles.
For a full technical review of EUR/USD, as well as the USDOLLAR Index, GBP/USD, AUD/USD, USD/JPY, USD/CAD, and NZD/USD, please watch the video above. If you haven't yet, read the Q2'16 Euro Forecast, "EUR/USD Stuck in No-Man’s Land Headed into Q2’16; Don’t Discount ’Brexit’," as well as the rest of all of DailyFX's Q2'16 quarterly forecasts.
**If you're interested in learning more about using a rules-based system to trade, Bryan Fletcher, DailyFX's Product Manager of Algorithmic Trading, wrote an insightful piece on what steps are necessary to take in order to get over the emotional and cognitive hurdles on the way to becoming a more successful algorithmic trader. Likewise, if you're interested in learning more about algorithmic trading, visit the DailyFX Algorithmic Trading page.
--- Written by Christopher Vecchio, Currency Strategist
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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.